OECD Economic Outlook, Volume 2025 Issue 2

Portugal

Real GDP growth is projected to reach 1.9% in 2025 and 2.2% in 2026, before easing to 1.8% in 2027. A tight labour market, increases in the minimum wage and a personal income tax cut are expected to support private consumption. Increasing disbursements of Recovery and Resilience Funds will contribute to higher public investment in 2026. Export growth will remain subdued reflecting weak external demand amidst higher US tariffs and high uncertainty. As labour demand remains strong, inflation will moderate only slowly to 2.0% in 2027.

Fiscal policy will remain expansionary in 2026 and turn contractionary in 2027, mainly reflecting the end of the implementation of the Recovery and Resilience Plan (RRP) in 2026. Fiscal prudence and structural reforms are key to sustain growth and maintain public debt on a firmly declining path. Over the medium term, containing ageing‑related spending pressures and reducing inefficient tax expenditures would make room for needed productivity-enhancing public investments. Continuing to lower entry barriers and streamline regulations in the retail sector and professional services would also support growth and productivity.

Growth has been resilient

GDP grew 2.4% over the year to the third quarter of 2025. Private consumption and investment remained strong in the first three quarters of 2025. Employment grew by 3.7% year-on-year in the third quarter of 2025, and labour costs per hour worked for employees increased by 4.7%. Tax cuts, a one-off pension top-up and moderate inflation have supported real disposable income growth. Business confidence strengthened in August and September and stood close to levels last observed at the end of 2024 in October 2025.

Portugal

Source: OECD Economic Outlook 118 database.

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Portugal: Demand, output and prices

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Credit to businesses and households recovered through 2024 and continued to expand in the first half of 2025 on the back of easing financial conditions. The current account and trade balance have declined from their historically high 2024 levels amidst elevated trade uncertainty. Portuguese exporters are facing a standard 15% tariff on goods by the United States. Though direct exports of goods and services to the United States represent only 2.8% of GDP, Portugal also faces weakening external demand from its main European trading partners. Goods exports have declined slightly by 0.1% in the year to the third quarter of 2025 (in nominal terms) despite a pick-up in September, and strong internal demand has continued to support import growth.

Fiscal policy will remain expansionary in 2026

Fiscal policy is set to remain expansionary in 2026, with an expected fiscal easing of around 0.5% of GDP. Spending from RRP grants is expected to increase from 0.7% of GDP in 2024 to 1.4% in 2025 and 1.4% in 2026, boosting investment without affecting the budget balance, while disbursements of RRP loans are set to increase from 0.2% of GDP in 2025 to 0.6% in 2026. Activity will also be supported by higher public wages, a further reduction in the personal income tax, business tax cuts and increasing defence spending. In 2027, the phase out of RRP grants and loans will lead to a contractionary fiscal stance, despite increasing spending from European cohesion funds. Persistent primary fiscal surpluses and sustained growth will lower the public debt to GDP ratio to 84.9% in 2027 (Maastricht definition). The minimum wage rose by 6.1% in 2025 and is set to rise by 5.7% in 2026 and 5.4% in 2027, stimulating wage and household income growth. At the same time, the broadly neutral monetary policy stance will help ensure that inflation is durably reduced, despite the tight labour market.

Internal demand will drive growth

GDP is projected to grow by 1.9% in 2025 and 2.2% in 2026, before decelerating to 1.8% in 2027. Spending of European funds will temporarily boost investment, but the slowdown in external demand will weigh on exports. Sustained wage growth and robust employment will raise consumption, especially as inflation and debt servicing costs are set to remain moderate. Tax cuts and higher wages will support household incomes but also slow the decline in inflation. Headline consumer price inflation will moderate to 2.2% in 2026 and 2.0% in 2027 as services price pressures diminish slowly, despite the rise in import prices. A further decline in the household saving rate and stronger than-expected wage developments could strengthen consumption but also fuel inflation. Higher than expected public expenditures, notably on defence, could also raise internal demand. By contrast, reduced disbursements of RRP funding and elevated uncertainty could weigh on investment, implying both lower growth and lower inflation.

Policy should support stronger and more sustainable growth

Sustained productivity growth, higher employment and more efficient public spending are needed to face rapid population ageing and significant investment needs, while keeping public debt on a firmly declining path. Implementing Portugal’s medium-term fiscal plan requires rolling out new accounting standards, greater use of spending reviews and shifting the structure of public spending towards investment. Consolidating means-tested benefits and reducing tax expenditures would streamline public support and support efficiency gains. Strengthening environmental taxation and recurrent taxes on property, notably on vacant homes, while protecting vulnerable groups would also help to attain ambitious climate goals and make room to lower labour taxes on low-wage workers. Reducing entry barriers in services, including in the retail sector, and simplifying building permitting procedures would raise investment and productivity. Reducing early retirement options and rebalancing expenditures on labour market policies towards training and counselling would also help to boost employment.